Demand for 'quality' drives iron ore gains

By Phoebe Sedgman

12 June 2015 — 12:34pm

Iron ore's gone from loathed to loved. The commodity is headed for a third weekly gain that's lifted prices to the highest in almost five months on lower port stockpiles in China and speculation local production is contracting.

Ore of benchmark-grade 62 per cent iron content delivered to Qingdao rose 0.3 percent to $65.61 a tonne on Thursday, according to Metal Bulletin. That's the highest level since January 23 and trimmed losses this year to 7.9 per cent. A third consecutive weekly climb would be the longest run since April.

Investment bank Citi believes iron ore prices will fall to $US42 a tonne in the third quarter of 2015.Credit:Nick Cubbin

Iron ore's roller-coaster ride this year saw prices sink to a decade-low in early April on rising low-cost supply from the top producers and concern demand in China may falter as growth slowed. Tumbling stockpiles in the biggest buyer, as imports missed expectations, helped to spur back-to-back gains in April and May, and prices extended the rally into June. Goldman Sachs is among banks predicting the factors that hurt prices in the first quarter will soon reassert themselves.

"There's been a significant destocking gone on and that would be why we've seen the iron ore price rising, seasonal factors and the fact that they are destocking," said David Lennox, a resource analyst at Fat Prophets in Sydney. "There's a lack of inventory in China."

Advertisement

Iron ore gained 28 per cent this quarter and is set for the first such advance since the final three months of 2013. Its performance beat all constituents in the Bloomberg Commodity Index, which added 3.4 per cent in the period, led by West Texas Intermediate crude oil, gasoline and Brent.

Holdings at ports in China fell 13 per cent to 85.4 million tonnes last month, and extended the drop in the first week of June to 83.8 million tonnes, according to Shanghai Steelhome Information Technology. That's the lowest since November 2013.

"Stockpiles have been lower quality," said Lennox. "So the 62 per cent iron has been basically just gobbled up as soon as it comes into the country."

Chinese iron ore futures also climbed. Most-active prices on the Dalian Commodity Exchange traded as high as 458.5 yuan ($US74) a tonne on June 11, the highest level since March 13, after rebounding from a low of 368 yuan on April 10.

The market will tighten in the second half as China imports more and mines less, according to Vale chief executive Murilo Ferreira. More Chinese miners than people realise have left, he said on Wednesday, predicting that in terms of steel, "we will have a better second half in China."